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KATHMANDU, Oct 21 (Reuters) - India and Nepal signed an agreement on Tuesday to start selling electricity to each other, deepening energy ties between the two nations and boosting New Delhi's efforts to grow its influence among its smaller neighbours.
Under the agreement, India will help develop Nepal's vast but underexploited hydropower potential and buy electricity to help tackle its own energy shortages. The agreement commits both countries to buy and sell electricity during times of shortages.
Nepal is estimated to have the potential to generate as much as 42,000 megawatts of electricity by harnessing the power of its rivers, but it has installed capacity of just over 800 MW and suffers blackouts for up to 18 hours a day.
"It will create a very good atmosphere for investment in Nepal as it will give confidence among investors that they will be able to sell electricity in the Indian market," Nepal's Energy Minister Radha Gyawali said.
"Investors who were earlier reluctant to put money in Nepal are now saying that they were encouraged by the prospects of selling electricity to India," she said.
India has been keen to re-assert influence among smaller neighbours where China has been forging closer ties, and the agreement follows Indian Prime Minister Narendra Modi's visit to Nepal in August.
Last month Indian company GMR Group and Nepal signed a $1.5 billion deal to build the 900 megawatt Upper Karnali hydroelectric plant in the northwest of the country, the single largest foreign investment scheme in Nepal.
China, which has built small hydropower plants for Nepal, is also in talks to build large-scale hydropower plants.
The power trade agreement with India will initially help Nepal to import electricity to meet domestic shortages.
India could start buying power from Nepal once the GMR plant starts generation in 2021 and Kathmandu is generating enough electricity to meet domestic demand, officials in Nepal said.
The export of power could help Nepal's trade deficit. According to state-run Trade and Export Promotion Centre, Nepal's deficit with India stood at $4 billion in 2013, up from $3.1 billion a year earlier. (Writing by Tommy Wilkes, editing by David Evans)